Governance shake-up for asset managers

Rebecca Claydon reviews the new rules and proposals from the FCA

The FCA have revealed their first step in a package of remedies aimed at improving practices across the Asset Management Industry.

This will be of interest to all asset managers but, for now, those who aren’t managers of authorised funds can breathe a sigh of relief as they are out of scope of the tough new rules.

The new rules are centred around governance improvements and will apply to the Collective Investment Schemes Sourcebook (COLL).

The remedies are a result of two-and-a-half-year investigation into the industry. They aim to address concerns outlined in the June 2017 final report of the asset management market study and are an important part of a wider package to improve competition in this industry for consumers.

Confirmed changes

The new rules and guidance, set out in PS18/8, which will be rolled out to those managing authorised funds over the next 12 to 18 months, address:

a requirement for fund managers to make an annual assessment of value, as part of their duty to act in the best interests of the investors in their funds

a requirement for fund managers to appoint a minimum of two independent directors to their boards

the introduction of a new prescribed responsibility under the Senior Managers and Certification Regime

changes to improve fairness around the way in which fund managers profit from investors buying and selling their funds

forcing fund managers to switch investors into cheaper share classes

Proposed changes

New proposals were also detailed in a further consultation paper (CP18/9) set out to improve the information that fund managers disclose to investors and potential investors. This may affect how information is presented in prospectuses, UCITS KIIDs and PRIIPs KIDs.

Overall the proposals complement other recent regulatory changes around disclousures, including MiFID II and PRIIPs but in our view the following changes make for interesting additons.

how fund objectives, including non-financial objectives such as social or environmental impact, can be expressed more clearly. Firms that set out non-financial objectives should be clear about how they will measure whether those objectives are being met, and should provide ongoing information to investors.

making it clearer when funds are benchmark-constrained, or limited in how far their holdings can differ from the weightings of a benchmark index

ensuring that where a fund uses one or more benchmarks, this is disclosed consistently and explained to investors

Does this affect my firm?

The new rules do not apply to all asset managers at present. They apply to "Authorised Fund Managers", a term that encompasses ACDs and managers of Authorised Unit Trusts and Authorised Contractual Schemes.

So for managers of unauthorised funds such as EIS and SITR funds, VCTs, hedge funds, PE, VC and many property funds this will make for an interesting read but not directly applicable.

The FCA specifically addressed this. In their feedback on whether they should extend any aspects of their governance proposals for the authorised funds market to other investment products, the FCA indicates that whilst they are doing further work in this area, they do not consider appropriate the wider application of the rules at the moment.